The European Commission has said it will take the German government to court for maintaining a law which shields car giant VW from takeover.
VW is Europe's biggest car maker
The German government has ignored repeated requests from the Commission to scrap the law, aimed at protecting jobs at VW, Europe's biggest car firm.
The law gives VW's home state of Lower Saxony a controlling minority stake in the firm, deterring potential bidders.
It also bars any investor from holding more than 20% of the voting rights.
The European Court of Justice (ECJ) is expected to take about two years to reach its decision.
The Commission argues that by effectively preventing foreign buyers from acquiring VW, the law hinders the cross-border integration of industry in the European Union, in breach of EU single market legislation.
Brands: Volkswagen, Audi, Seat, Skoda,Bentley, Bugatti, Lamborghini
Stagnant sales: 87bn euros ($106bn; £59bn) in 2003 vs 91bn euros in 2002
Declining profits: 1bn euros ($1.3bn; £750m) in 2003 vs 2.9bn euros in 2002
Workforce: 336,800 in 2003
Sources: Thomson Banker; Worldscope; Morgan Stanley
"Within the single European market, people and companies should be able to invest where they like without artificial obstacles," said a spokesman Frits Bolkestein, the EU Internal Market Commissioner.
But the Commission's complaints have previously been rebuffed by German Chancellor Gerhard Schroeder, who sat on the VW board for eight years in his former role as premier of Lower Saxony.
The Lower Saxony authorities said they were confident that the ECJ would rule in their favour.
"We are convinced that the VW law complies with EU law," a spokesman said.
Lower Saxony holds 18.2% of the voting rights in VW, in a so-called 'poison pill' shareholding designed to deter bidders.
Volkswagen has declined to comment.
VW's trade unions have opposed scrapping the law, arguing that jobs would be at risk if the car maker were to be taken over.
Klaus Volkert, the head of VW's works council, said the Commission's decision was "ideologically motivated" and hypocritical.
"Many EU member states have several imaginative mechanisms to protect their own companies", he said, adding it was "completely unacceptable that double standards are being applied."
The VW law is often cited as an example of Germany's consensus-based model of industrial relations.
It was introduced in 1960 when the company first listed on the stock market.
The car maker's board has seats reserved for trade unions and regional government.
VW shares were up 1.6% in Frankfurt as traders digested the news.